European Journal of Business and Management www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.7, No.7, 2015 261 The Relationship of Corporate Governance and Firm Performance Fazli Azim SZABIST, Islamabad, Pakistan Manzoor Ahmed Nasir Ali Zia u-Din College of Business Administration King Saud University, Riyadh Saudi Arab Abstract This survey based research administered 300 questionnaires to the middle and top level managers of 130 Karachi Stock Exchange (KSE) listed firms. The questionnaire used in this study was designed to study the relationship between corporate governance structure and firm performance. The findings of this research shows that among corporate governance dimensions, “commitment to corporate governance” , “transparency and disclosure” and “Structure and function of Board” have the highest middle and lowest mean values respectively assigned by the sample studied. Further regression analysis showed that “commitment to corporate governance” , “transparency and disclosure” have significant positive relationship with firm performance. Finally study find that “Structure and function of Board” has positive with firm performance that is not statistically significant. Keyword: corporate governance, firm performance, commitment to corporate governance and transparency and disclosure 1.1. Introduction Corporate governance is an economic area, researching how to operate firms more effectively through such system arrangements as contract, organization plan, legislation and so on. In the light of entrust and agency theory, corporate governance is the outcome when ownership of modern corporations is divided from management. In modern corporations, ownership and operation section are separate, and owners can build up entrust and agency relationship with the management through sighing contracts, under which one person or more (i.e. Grantors) hide another person (i.e. agent) to represent them fulfilling some service, including handing over a part of decision making rights to the agents. (Jensen and Meckling, 1976) Corporate governance is originated from the existence of the following two problems: on the one hand, agency problem. Agency problem comes about because there are conflicts of interest between the parties concerned in the firm and shareholders and the management strives to seek for their own interests. On the other hand, trade cost. That is because contracts can’t resolve all agency problems completely. Owing to the existence of trade cost, contracts signed between owners and the management can not possibly be one hundred percent, namely, any contract is not able to take all uncertain events to happen in the future into account, as a result, the management is likely to conduct behaviors of opportunism (Shleifer and Vishny, 1997) .The investors therefore need to control the management’s actions, stimulate and restrict them, and realize investors’ interest optimum through setting up some mechanism. As a result, corporate governance is actually a series of mechanism to solve problems of interest conflicts and problems of incentives between investors and the management. This research concentrates on listed firm’s performances and its relationship with corporate governance structure after information Disclosure procedures of Securities and Exchange Commission of Pakistan (SECP) in 1999. The data for the research analysis of each section was collected through a questionnaire on various aspects of corporate governance and firm performances. 1.2. Objective of the research: The objective of research is to study the relationship between corporate governance structure and firm performance. Firm performances are a variable to measure directly, and then we can directly study the relationship between corporate governance structure and firm performances. Black and Jang (2003) this research introduces significant relationship between corporate governance and firm performances by getting responses through survey based questionnaire. 1.3. Problem Identification It is comprised of External Control Mechanism and Internal Control Mechanism (Fama, 1980; Fama and Jensen, 1983; Shleifer and Vishny, 1986; Jensen, 1993). External Control Mechanism is to realize indirect control not only through competitive product market, capital market, manager market and firm’s control right market, but also by laws and regulations and systems. In these external markets fierce competition brings extreme pressure on the management staff. If the firm does not run well, it will lose share in product market and lose its profits,